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New rule aims to protect consumers against risky mortgages

Updated: January 9, 2013 11:56PM

A new federal rule on home loan lending will give consumers more protection against risky mortgages, the government says, but it isn’t immediately expected to make mortgages easier to get.

The Consumer Financial Protection Bureau adopted the rule on Thursday. It spells out what lenders must do to ensure that borrowers can afford their mortgages.

The rule is meant to guard against lending practices that preceded the housing bust, when many borrowers took on risky loans they didn’t understand and could not afford. A wave of foreclosures followed, helping to drive down home prices more than 30 percent since 2006.

“Washington is saying that we’re going to protect borrowers and regulate what mortgages are going to look like,” said Brian Gardner, a policy analyst with financial services firm Keefe Bruyette & Woods.

Richard Cordray, director of the consumer protection bureau, called the rule a “common sense” one that “ensures responsible borrowers get responsible loans.”

But some consumer groups say it gives lenders too much protection — and low-income borrowers not enough.

The rule “invites abusive lending,” said Alys Cohen of the National Consumer Law Center.

The rule, as required by the 2010 Dodd-Frank financial overhaul legislation, defines what constitutes a “qualified mortgage.”

If lenders meet those standards, borrowers who default will have little recourse to fight foreclosure by claiming the lender sold them a risky loan. The rule, effective next year, says a qualified mortgage cannot:

◆ Contain “risky” features, such as terms that exceed 30 years, interest-only payments or negative-amortization payments, in which the principal amount increases.

◆ Carry fees and points in excess of 3 percent of the loan.

◆ Be issued to borrowers who, once getting the mortgage, will spend more than 43 percent of their income on debt payments.

Cohen says that 43 percent is too high for some low-income people who might get those loans and then have no recourse.

Lenders can make loans that do not meet the qualified mortgage standards. If so, they won’t have the same protections against consumer challenges.

The rule’s standards largely track with current lending practices — which many complain are too restrictive — and “doesn’t do anything to loosen credit,” said Guy Cecala, CEO of Inside Mortgage Finance.

The bureau says the clarity of the rule, which lenders have sought since 2010, will enable banks to ease standards over time.

It will be harder to get interest-only loans, which are popular with wealthier borrowers, Cecala said.

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